The Xiamen Changelight Co., Ltd. (SZSE:300102) share price has done very well over the last month, posting an excellent gain of 29%. Looking further back, the 18% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Although its price has surged higher, Xiamen Changelight may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 2.8x, considering almost half of all companies in the Semiconductor industry in China have P/S ratios greater than 5.4x and even P/S higher than 10x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

What Does Xiamen Changelight's Recent Performance Look Like?

Xiamen Changelight has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S is low because investors think this respectable revenue growth might actually underperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

How Is Xiamen Changelight's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Xiamen Changelight's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered an exceptional 24% gain to the company's top line. The latest three year period has also seen an excellent 39% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 36% shows it's noticeably less attractive.

With this information, we can see why Xiamen Changelight is trading at a P/S lower than the industry. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

The latest share price surge wasn't enough to lift Xiamen Changelight's P/S close to the industry median. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

In line with expectations, Xiamen Changelight maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

Having said that, be aware Xiamen Changelight is showing 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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